No one likes paying for mortgage insurance (except your lender) on an FHA or any home loan for that matter. FHA mortgage insurance premiums drives up your monthly payment and your out-of-pocket expenses at closing. Sure there are many advantages to FHA backed home loans: you can purchase your home with little down and mortgage refinancing doesn’t require an appraisal. Ask anyone with an FHA home loan if they’d like to ditch their costly mortgage insurance and the answer is a resounding “Yes!” Here are several tips to help you drop that pesky FHA mortgage insurance.
The Role of the FHA
The FHA isn’t in the business of buying home loans like Freddie Mac; they simply insure your mortgage against default. If you default on your FHA backed home loan and the lender forecloses, the FHA covers the bank’s losses. You still lose your home; however, the lender is protected. No tax-dollars are used by the FHA to insure home loans, the losses are all covered by mortgage insurance premiums paid by homeowners with FHA backed home loans.
There are two types of premiums you’ll encounter with any FHA backed home loan. You’ll be required to pay Upfront Mortgage Insurance Premiums when closing on your home loan and Annual Mortgage Insurance Premiums. The Upfront Mortgage Insurance Premium is simple: one percent of your loan amount, paid at closing. If your home loan is $200,000 you’ll be required to pay $2,000 for upfront mortgage insurance premiums at closing in addition to the loan origination fee and other lender fees.
Your Annual Mortgage Insurance Premiums are based on your home loans term length (30 year vs. 15 year) and your loan-to-value ratio. The longer your term length and the less equity you have in your home the higher your annual mortgage insurance premium will be.
How to Ditch FHA Mortgage Insurance
The good news for FHA mortgage holders is that you don’t have to pay the insurance forever. On a 30 year mortgage you’re required to pay the annual mortgage insurance premium for at least 60 months and when your loan-to-value ratio (LTV) reaches 78% the mortgage insurance is automatically cancelled. On a 15 year mortgage you don’t have to wait the 60 months, your mortgage insurance cancels automatically at 78% LTV. The FHA will use your original appraisal when determining LTV so the lender cannot require you to get a new one just to keep your mortgage insurance going. The more equity you build in your home the faster your mortgage insurance will cancel.
If you’re considering mortgage refinancing with one of today’s best mortgage companies like Amerisave, check out my free Underground Mortgage Videos to see how you can get today’s lowest refinance mortgage rates without paying unnecessary fees.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
